Next-Gen Core Banking: Transitioning from Cloud-Native to Cloud-Agnostic Solutions in Banking
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Introduction: Cloud-native vs. Cloud-agnostic - WHY now?
The rise of demand for digital, real-time, and intelligent services from customers has driven the need for banks to tailor and innovate their current services with a focus on agility, scale with speed, and lower operating costs.
Cloud adoption in banking has been revving up momentum in the Asia-Pacific region as it enables banks to integrate and analyze vast volumes of real-time data using AI and machine learning to offer intelligent customer-centric services. In addition, banks' regulations and compliance requirements have evolved rapidly, requiring the ability to churn and analyze data quickly as a key driving factor to keep pace with the rest of the world. A survey by The Asian Banker showed that 58% of bank leaders in Asia saw the enhanced ability to apply advanced analytics to data as a cloud benefit.
Banks in Asia are currently adopting two kinds of cloud solutions: Cloud-agnostic and cloud-native. They both offer advantages and disadvantages for banking in Asia, and understanding these differences can help banks make informed decisions about which solution suits their needs.
Cloud-agnostic solutions enable greater flexibility to choose from various cloud providers, including public and private clouds, as well as on-premises solutions. This approach can give banks more significant control over their infrastructure and applications and allow them to choose the best cloud provider for their specific needs. However, cloud-agnostic solutions can also be more complex to manage, requiring additional effort to ensure compatibility across different cloud providers.
In contrast, cloud-native solutions are specifically designed to take advantage of cloud environments' unique features and benefits. They are built using microservices, containers, and other cloud-specific technologies, allowing them to be agile, scalable, and efficient. They also tend to be more cost-effective, as they can take advantage of the pay-as-you-go pricing models of cloud providers. However, cloud-native solutions require greater expertise to design, deploy, and manage and may be less flexible in choosing cloud providers.
Notably, research suggests that banks in Asia are increasingly adopting cloud-native solutions over cloud-agnostic solutions. The Asian Banker reports banks are finding that cloud-native solutions offer greater capabilities than traditional on-premises solutions and are better suited to meet the demands of customers for digital, real-time, and intelligent services. However, the report also noted that some banks are taking a hybrid approach, using both cloud-native and cloud-agnostic solutions to balance the need for flexibility with the benefits of the cloud-native architecture.
Both cloud-agnostic and cloud-native solutions have their benefits and challenges, and banks in Asia must carefully weigh their options to determine which solution best suits their needs. While cloud-native solutions are becoming increasingly popular, some banks may find that a hybrid approach using both cloud-agnostic and cloud-native solutions is the best way to balance flexibility, scalability, and control, but of course, this would vary from one bank to another, and we are still at the tip of the iceberg.
In this article, we seek to unravel the rapidly evolving changes to the banking sector, including how finance is changing, a sample case study of adopting cloud solutions, and why this trend will persist as we veer towards cloud solutions as the future of banking.
Chapter 1: Finance Transformation
Open banking is becoming increasingly vital in Asia, with regulations driving the need for flexible and agile core banking systems as we transition towards a more digitalized era than ever before. According to Forbes, the global open banking market is expected to grow from $15.13 billion in 2020 to $43.15 billion in 2026.5
It allows application programming interfaces (APIs) to streamline the sharing of customer bank data with third parties to provide products and services around a centralized platform, enabling customers to have greater control and ownership over their personal information used by financial institutions. This "opens up banks" and allows for greater innovation and competition within the industry. The move towards open banking in Asia is mainly commercial, driven by innovation, interconnectivity between banks, and a dynamic ecosystem of fintech.
In Asia, banking leaders have taken decisive steps to strengthen their core banking systems by focusing on productivity, risk, and capital optimization. Through extensive digitization, many have significantly reduced operating costs by 30-40% across sales and service, support functions, and back-office operations. This has been largely driven by the need to meet regulatory requirements around open banking and APIs.
According to a report by BCG, Southeast Asia's banking sector is projected to grow significantly in the coming years, with Vietnam, the Philippines, and Indonesia on track to register double-digit growth from 2019 to 2024, largely due to their large underbanked populations and the potential for disruption by successful digital banks.
Implementing open banking regulations is pushing banks in Asia to become more agile and flexible, driving innovation and competition within the industry. As a result, core banking systems are evolving to meet the changing needs of customers and the industry.
To delve deeper into how the mechanism works, we found a real-life case study on how cloud-native solutions have impacted DBS Bank Singapore.
Chapter 2: Case study example - DBS Bank Singapore
Digital transformation is revolutionizing the banking industry, and DBS Bank in Singapore is spearheading this transformation. According to McKinsey, DBS Bank is one of the leading banks that has successfully embedded digitization across the full range of banking processes and services.10 Its cloud-native digital banking platform has enabled the bank to provide its customers with agile, scalable, and secure digital banking services.
The platform has allowed DBS Bank to rapidly develop and deploy new digital services, such as mobile banking and online payments, while also fortifying the security and improving the reliability of its existing services. By leveraging emerging technologies such as 5G, IoT, blockchain, quantum computing, and AI, DBS Bank can provide personalized insights to its customers, driving intelligent banking capabilities across digital banking services.
DBS Bank's cloud-native digital banking platform is built on Amazon Web Services (AWS) and uses a microservices architecture to provide a seamless customer experience. The platform enables the bank to launch new products and services quickly, improve operational efficiency, and enhance security. The platform allows the bank to scale its operations in new markets easily. DBS Bank has been using AWS since 2016 and has collaborated with the company to develop innovative solutions such as a cloud-based digital trade finance platform.
DBS Bank's digital transformation has been widely recognized, with accolades including "World's Best Digital Bank" by Euromoney and "Safest Bank in Asia" by Global Finance for 12 consecutive years. Its success has been driven by embedding digitization across the full range of banking processes and services. As a result, DBS Bank's digital customers had twice the income per customer compared to traditional customers, and the digital segment had a much lower cost-to-income ratio compared to the traditional segment.
DBS Bank's continued success in the digital age highlights the importance of adopting a cloud-native digital banking platform. By doing so, banks can provide their customers with personalized, agile, and secure digital banking services while remaining competitive and driving intelligent banking capabilities that cater to customers’ changing needs. As the banking industry continues to evolve, it is clear that those who embrace digital transformation will be the ones to succeed.
Chapter 3: Banking on Cloud - It’s no longer about adoption; it’s about acceleration
- Next-gen core banking is a major trend in the Asia Banking industry, as 95% of banks in Asia are running on outdated core banking technology, limiting their ability to innovate and provide better services to customers.
- McKinsey & Company notes that banks need to replace their core applications with next-generation core banking applications to stay competitive.
- Digital banking in Asia is growing due to soaring demand for online and mobile alternatives.
- New digital players are shaking up the market and transforming banking for individuals and companies.
- Deloitte predicts that banks need to start putting strategies in place now to prepare for banking in 2030, making next-gen core banking a continued major trend in the Asia Banking industry.20
Get ready for Next-Gen Banking
The Asian banking industry is experiencing a major shift towards digitalization and innovation. Next-gen banking is a primary factor in driving this transformation as we see a rise in demand for online and mobile banking services that have evolved how banks operate and collaborate with third-party providers.
Next-gen core banking is a necessary step for banks to upgrade their outdated core banking technology and enable them to innovate and provide better customer service. It may very well be the start of the embarking on an evolved industry as consumers adjust their needs and interests towards digital payments with cryptocurrencies or other forms of blockchain-related currencies and embrace the idea of decentralized finance as it may very well be our reality in 10-15 years.
Tomorrow may belong to no one, but it is in the moments we have today that we should leverage to embrace uncertainty and grasp opportunities. To understand further the impacts of next-gen banking, join us at Fintech Connect Leader's Asia 2023, and we look forward to meeting you!
